Families file suit over insurance policies

BATON ROUGE - In an attempt to force insurance companies to cover billions of dollars in hurricane damage instead of foisting it on the federal government, a group of 15 families from the New Orleans area filed suit Thursday asking a state court judge to rule that any flooding from Katrina is covered by a resident's homeowner policy.

The class-action lawsuit, which does not seek any monetary damages, comes amid a chorus of complaints from state lawmakers about the insurance industry's response to Katrina. At a joint legislative hearing Thursday, representatives of the state's three largest insurers were accused of shirking their responsibility to residents whose property was destroyed by the storm.

State Rep. Emile "Peppi" Bruneau, R-New Orleans said the insurers had taken an "adversarial position" to their policyholders by declaring that flood damage caused by Katrina is not covered under a homeowner's insurance policy. Instead, insurers have told residents that such claims must be submitted through the federal government's flood insurance program. Lawmakers said less than half of the residents in metropolitan New Orleans have flood insurance.

Bruneau warned that "World War III" would break out if the companies don't change their position.

"I would hope you all would take a very strong message back to your companies that you are going to have some extremely angry people who are not just going to sit there, '' said Bruneau, who later added, "I think we can do with a little less of the wringing of the hands and a little more creativity."

While insurance company representatives promised to do whatever they can to pay claims as quickly as possible in Louisiana, they balked at the lawmakers' request that they pay claims not covered by homeowner's insurance.

"No doubt there are lawsuits that will come out of this, '' said E.L. "Bubba" Henry, a lobbyist for State Farm Insurance. "But the insurance policies cover what they say they cover. To tell insurance companies that they must pay for damages that aren't covered - and that we didn't collect a premium on - is to bankrupt the industry.''

Bruneau wasn't swayed. "I don't want to see the industry go bankrupt, but I don't want to see 50,000 to 100,000 people go bankrupt, either.''

Though homeowners policies provide compensation for damage resulting for high wind, they don't cover flood damage. Instead, such claims are covered by federal flood insurance, which limits reimbursement to $250,000 - not matter how high the actual damages are.

Insurance Commissioner J. Robert Wooley said it's possible some insurance companies will broaden the types of claims they're covering from Katrina, given the exceptional ferocity of the storm. Damages from Katrina are expected to reach $200 billion, a record for a natural disaster in the U.S.

Wooley likened the situation to 9/11, when insurance companies opted to pay about $20 billion to cover losses caused by the terrorist attacks, even though acts of war are specifically exempted from most policies.

"I think you will see that coming into play in some instances'' for Katrina victims, Wooley told lawmakers on Thursday, though he said he isn't certain how far the companies could afford to go.

Wooley acknowledged there are "huge gaps" in the losses covered by flood insurance and those covered by homeowners policies, but he said he is confident FEMA will ultimately deliver for the state. He said the agency did an "admirable job" in delivering aid to previous disaster victims.

But lawmakers were upset that FEMA was not at the hearing. The agency's representative left shortly after it started. Lawmakers said the crisis won't be resolved until state officials can hold a hearing at which all of the major players are present: the insurance industry, state government and FEMA.

"Someone has to take some leadership in this state, '' said Sen. James David Cain, R-Dry Creek, chairman of the Senate insurance committee. "We can't keep dancing around. It's either going to be the insurance commissioner or the governor or this committee…. And if nobody else is going to do it, we're going to do it. Somebody's got to bring this bunch together.''

Cain threatened to issue subpoenas to FEMA representatives in Louisiana if the agency misses another committee hearing.

FEMA officials declined to comment.

Cain asked Wooley who he thinks should pay for the flood damage, the insurers or the federal government.

"I'm not God, '' Wooley said. "I'm not able to answer that question."

Wooley cautioned the lawmakers not to squeeze the insurance industry too hard. "We have an obligation not to bankrupt an entire industry, '' he said.

Former Insurance Commissioner Jim Brown, who is acting as an unpaid consultant for the 15 families who filed the class-action suit on Thursday, said fears of bankruptcy are overblown.

He said the companies involved in Katrina have reserves of $500 billion, which are more than enough to offset the estimated $50 billion in losses they face over the hurricane. What's more, he said, about 80 percent of those losses will ultimately be covered by huge reinsurance companies in Europe and elsewhere around the world, who took on that risk as an investment.

Brown predicted insurers won't have trouble taking on an additional $20 billion or so in losses to cover the flood damage they are now trying to shift to the federal government.

"I'm sure it's going to hurt, but it's not going to be a bankruptcy situation, '' Brown said.

The lawsuit estimates that up to 160,000 homes were rendered uninhabitable by the hurricane, mostly because of flood damage caused by levee breaks in the 17th Street Canal and the London Street Canal.

The suit, which was filed in East Baton Rouge Parish, asks that a judge declare that any flooding caused by those levee breaks does not fall within the industry's standard "rising water" exception and is thus covered by a homeowners policy.

Though the lawsuit does not address flooding caused by storm surge, which inundated homes in St. Bernard and St. Tammany parishes, attorney Joseph Bruno said that issue will be addressed soon, either in another lawsuit or within the existing case.

Bruno said his firm does not expect to make any money on the litigation, which is being financed by three big firms that have won billions of dollars in class-action lawsuits in recent years. The firms are Bruno & Bruno, Fayard & Honeycutt, McKernan Law Firm, and Vernon P. Thomas, Esq. He predicted expenses will top $100,000.

"Frankly, getting paid is the last thing I'm worried about right now, '' Bruno said. "If someone in the future can get us paid, I'll take it, but that is not my motivation.''

Bruno has asked that hearings on the case be expedited, but he said residents should not expect a quick resolution. Even if the dispute moves quickly, he said it will be at least six months before the matter reaches the Louisiana Supreme Court, which he expects will make the final ruling on the suit.

The case is one of two that was filed against the nation's big insurers on Thursday. Mississippi's Attorney General also sued the industry in an attempt to force them to pay for flood damage, saying standard insurance policies led homeowners to believe they are covered for all hurricane damage, whether from wind or flooding.

"The residents and/or property owners of Mississippi Gulf Coast purchased these policies from defendants for the primary purpose of insuring against any damage that could possibly result from hurricanes originating from the Gulf of Mexico, '' Attorney General Jim Hood said in his lawsuit.

In Louisiana, lawmakers chafed at the slow process of the nation's insurance giants, asking why they can't simply write checks for the limits of policies in areas which are likely to be declared a total loss by FEMA, such as the lower 9th Ward in Orleans Parish and most of St. Bernard Parish.

As it stands, adjusters won't be able to visit some of those areas for weeks, if not months, because they can't inspect a property until the homeowner returns.

Sen. Ann Duplessis, whose eastern New Orleans home was flooded by the storm, said insurers don't even have to send an adjuster in some areas because it's obvious whole swaths of the city were under eight feet of water or more for two weeks.

"I'd like to know why you can't just pay the face value of the policy so people can get on with their lives, '' Duplessis said.

Henry said the company can't pay that kind of money without actually visiting the property, but he noted that State Farm has handed out $2,500 checks to about 90,000 homeowners who were hurt by Katrina. Those payments were considered an advance on their covered losses, and cost the company about $225 million.

Though it may take a long time to rebuild the region, Henry said, "I don't think it's going to take two to three years to pay those claims.''

The Associated Press contributed to this report. Jeffrey Meitrodt can be reached at Meitrodt@cox.net.